Singapore

The petitioner and the appellant initially agreed to wind up the company on the ground that it was just and equitable to do so. The appellant caused the restaurant staff to be dismissed and the restaurants equipment to be sold. In November 1989, the petitioner commenced winding-up proceedings on the grounds that there was a loss of the substratum of the company and a deadlock between the two directors in the management of the company. Yong Pung How CJ4 found for the petitioner. The appellant then appealed on the following grounds that the learned CJ had:
(a) failed to confine himself to the heads of complaint set out in the petition when he ordered the company to be wound up on the ground that the relationship of trust and confidence between the directors had broken down; (b) failed to consider that the relationship between the petitioner and the appellant was not in the nature of a partnership or quasipartnership; (c) failed to consider that the petitioner did not come to court with clean hands in that the problems relating to the companys management were caused by him; (d) erred in finding that there was a deadlock in the management of the company; (e) erred in disregarding the majority shareholding of the appellant, and his casting vote as chairman at directors meetings; (f) erred in finding that the companys substratum was the business at Shaw House.

Chua Kien How v Goodwealth Trading Pte Ltd & Anor: Winding Up on the Just and Equitable Ground
by Leow Chye Sian*
Introduction A company may be wound up if the court is of the opinion that it is just and equitable to do so under s 254(l)(i) of the Companies Act.1 If the only two directors and shareholders of a company who had been working on a personal relationship of mutual confidence cannot get along and do not communicate with one another, should the court make such a winding-up order? What is meant by a deadlock in the management of the companys affairs? Must there be an actual deadlock or would it be sufficient if there is a breakdown in the personal relationship of trust and confidence even though there is no actual deadlock and the company is still making profits? Must one prove that the company was in substance a partnership before the court will make a windingup order on the just and equitable ground? What is meant by a loss of substratum of a company? Can one look beyond the memorandum of association of the company to determine what are the main objects of the company in the case of a shelf company, that is, a company formed by corporators with no particular object in mind and their purpose was to sell it to whomsoever needs a corporate vehicle quickly in order to start a business ... They were all paper" objects designed for all things and for all seasons.?2 These are some of the interesting and relevant corporate legal questions raised in the recent case of Chua
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Kien How v Goodwealth Trading Pte Ltd & Anor.3 Facts The petitioner bought the company as a shelf company in 1984 for the purpose of carrying on the business of a restaurant at Shaw House, Orchard Road, after he had acquired a lease of the site. He then invited three other persons to join him in that business. The company lost money and was unable to pay its rent. The landlords issued a writ of distress against the company for the arrears in rent in 1986. In May 1986, the appellant, Chua, entered into a restructuring agreement with the petitioner whereby the other shareholders and directors transferred their majority shareholdings to the appellant. In return, the appellant gave a personal guarantee to the landlords so that the writ of distress was withdrawn. The appellant also became a co-director with the petitioner and chairman of the board of directors of the company. Later, disputes between the appellant and the petitioner as regards shareholding and control of the company arose. As a result, both the appellant and the petitioner did not communicate with each other in the management except through a mutual friend. The petitioner refused to attend meetings as the appellant attempted to appoint his brother as a co-director. In 1989 the landlords served the company a notice of termination of the lease of the restaurant premises.

Decision Chan Sek Keong J, in delivering the judgment of the Court of Appeal, considered the first five grounds of appeal together as they all related to the issue of deadlock in the company, and held as follows:
(a) Yong Pung How CJ did not go outside the grounds set out in the petition. (b) The relationship between the petitioner and the appellant was in the nature of a partnership or quasi-partnership. They agreed to run the business together with the petitioner looking after the day-to-day business and the ap-

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(c)

(d)

(e)

(f)

pellant in some sort of supervisory role as a cheque signatory. The appellant must have trusted the petitioner to run the business properly and the petitioner must have trusted the appellant to resolve any future problems with the landlords. It is wrong to say that the petitioner did not come to court with clean hands, taking into account the reasons why the petitioner had refused to attend the meetings and the reasons why the appellant wanted the meetings. There was a deadlock in the management of the company as evidenced by the appellant being unable to break the deadlock for more than a year. On the facts, it was disputed that the appellant had majority shareholding and casting vote as chairman at meetings of the directors. The companys substratum was the business at Shaw House and the closing of the restaurant located therein destroyed the substratum.

ship, justifies the court in winding up the partnership.7 This may appear to suggest that the narrower Warrington LJ view is to be adopted (ie that a partnershiplike association, together with grounds which would have justified a dissolution of a partnership in partnership law, must exist before a winding up on the just and equitable ground will be given). However, it is to be noted that the majority of the Court of Appeal in the case of Re Yenidje Tobacco Co Ltd8 while agreeing that this is sufficient to justify winding up, rested their judgment on the broader basis of a statement from Lindley on the Law of Partnership9 according to which dissolution of a partnership will be granted where there is such a state of animosity as precludes all reasonable hope of reconciliation and friendly co-operation between the partners. It can be seen that the said majority were of the view that it is not essential that there should be no possible alternative means of ending a dispute between persons who belong to a company which is in substance a partnership in the form or guise of a private company.10 As stated by Mcpherson in his article entitled Winding Up: Just and Equitable Ground:11 For, among such persons there exists a personal relationship, which has its source in the fundamental assumption that they will act as reasonable men with reasonable courtesy and reasonable conduct in every way towards one another"12 and it is the destruction of that personal relationship, and not the absence of some compulsive means of terminating the deadlock, which provides the criterion for the intervention of the court in these cases. It should be noted that Warrington LJs judgment in the case of Re Yenidje13 was the minority judgment. It is submitted that there need not be actual deadlock in the management of the affairs of the company; so long as there was a personal relationship of trust and confidence and it has become impossible for the parties to place confidence and trust in each other resulting in the destruction of that personal relationship, the court is justified in ordering a winding up of the company on the just

and equitable ground. This can be seen in Re Yenidje where the company was still making profits. The fact that Chan Sek Keong J distinguished Loch & Anor v John Blackwood Ltd14 (on the ground that, in that case, one director or shareholder had majority control while in the present case the petitioner had claimed that he had equal control of the company with the appellant) may add further to the suggestion that he favoured the narrower Warrington LJ view. Chan Sek Keong J did go on to accept,15 as the factors which a court would take into account in deciding whether to wind up a company under the just and equitable ground, the grounds enumerated by Lord Wilberforce in Ebrahimi vWestbourne Galleries Ltd: The superimposition of equitable considerations requires something more, which typically may include one or probably more, of the following elements: an association formed or continued on the basis of a personal relationship, involving mutual confidence this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be sleeping members) of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members interest in the company so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.16
(i)

Comments The writer will deal with the judgment on the first five grounds of appeal under the heading, Deadlock in management of company and the judgment on the sixth ground under the heading, Loss of substratum. Deadlock in management of company Chan Sek Keong J stated: Although Yong Pung How CJ did not make an express finding that the company was in the nature of a partnership or quasi-partnership, his grounds of judgment clearly implied that he was of the view that that was the relationship between the petitioner and Chua [the appellant].5 Chan Sek Keong J cited the judgment of Warrington LJ in Re Yenidje Tobacco Co Ltd6 as the leading authority on when a corporate undertaking would be wound up on the basis that it is a partnership or quasipartnership, and stated: The principle can be simply expressed: if the only two directors of a company cannot agree with each other, and neither can overrule the other, there is a deadlock which, if it occurs in a partner88

This must mean that the principles favoured are actually much wider than those stated by Warrington LJ. Chan Sek KeongJ did not expound on the three elements quoted from Lord Wilberforces judgment although he said: In our view, the above statement applies to this case. Although the presence of elements (i) and (ii) were disputed, we are of the view that there was sufficient evidence on which Yong Pung How CJ
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could be satisfied that they had been fulfilled. Element (iii) is certainly present. Leaving aside the question of who had the majority shareholding, the evidence shows that the petitioner and Chua had exercised joint control of the company since Chua became a shareholder until the cessation of the companys business, ie from May 1986 to December 1989. Chua has not explained why the petitioner was able to exercise equal power in the company if what he had alleged was true.17 Cases on this ground of winding up are rare, especially at the Court of Appeal level. It would have been more helpful to legal practitioners and businessmen caught in a corporate bind if Chan Sek Keong J had seized the opportunity to discuss in greater detail the law as regards winding up on the just and equitable ground in the so-called partnerships or quasi-partnerships cases. Two questions arise for comment. First, does one have to determine if the company is in substance a partnership albeit operating in corporate form? Secondly, if the answer is yes, whether the company should be wound up only if the facts put before the court would give grounds for dissolution of a partnership under partnership law? It is submitted that the court need not determine whether the company is in substance a partnership; otherwise, the court will have to select a particular type of partnership as a model and selecting any particular type of partnership as a model with which companies should be compared cannot be logically justified because it involves casting aside other types of partnership that equally qualify to bear the description partnership".18 Also, the law in this area should not hinge on the concept of partnerships or quasi-partnerships, for as Lord Wilberforce stated: To refer, as so many of the cases do, to quasi-partnerships" or in substance partnership" may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conception of probity, good faith and mutual confidence, and the remedies where these are absent,
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which become relevant once such factors as I have mentioned are found to exist: the words just and equitable" sum these up in the law of partnership itself... But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations may come in.19 As pointed out by Lord Wilberforce, the function of the just and equitable provision is to enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.20 Hence it is submitted that to order a winding up on the just and equitable ground, under s 254(1 )(i) of the Companies Act, it is not necessary to determine whether or not the company is in substance a partnership and then consider whether or not in partnership law a winding up would be made. Instead, the court should look at the make-up of the company and the relationship of the directors and members taking into account both legal rights as well as equitable considerations, considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable to insist on legal rights or to exercise them in a particular way.21 The petitioner under the just and equitable provision need only show that there is some departure from the basic obligations underlying the relationship into which the members of the company have entered. What are the basic obligations? One would be that the affairs of the company will be managed so as to reflect mutual confidence by the members in each other. Another would be that all members of the company will prima facie have some managerial responsibility. Thirdly, restrictions on the transfer of the members interest in the company.22

With regard to element (i) the appellant contended that the relationship between the appellant and the petitioner was not one of mutual trust and confidence because the appellant was not one of the original shareholders. To this, Chan Sek Keong J said, We do not see the relevance or purport of this argument in the context of this appeal. However, on the facts, it seems to us that the petitioner and Chua must have reposed trust and confidence in each other ... Chua must have trusted the petitioner to run the business properly and the petitioner must have trusted Chua to resolve any future problems with the landlords.23 Most cases on this ground concerned companies which were incorporated with a particular association of trust and confidence in mind at the very outset. This case is unusual in that not only do we have a shelf company, but the association was formed some time after acquisition of the company by one of the eventual partners; and who, apparently, did not have at that time that association in mind. The Goodwealth Trading case establishes that it does not matter that an association was not formed on the basis of a personal relationship, so long as the association continued on the basis of a personal relationship, involving mutual confidence. Loss of substratum of company As regards the issue of whether it was just and equitable to wind up the company on the ground of loss of substratum of the company, Chan Sek Keong J agreed with the approach adopted by Yong Pung How CJ in saying that: The memorandum of association lent no assistance whatever to the task of ascertaining the main object or substratum of the company. The reason is that it was formed as a shelf company by corporators with no particular object in mind. Their purpose was to sell it to whomsoever needs a corporate vehicle quickly in order to start a business. The objects clause was accordingly drafted to include as many objects as the draftsman could think of. They were all paper" objects designed for all things and for all seasons.24

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Since the memorandum of association offered no help, the learned judge looked at the circumstances in which the petitioner bought the company and the appellant became a shareholder, and concluded that the main object of the company was its restaurant business located at Shaw House specifically and at no other place. It is submitted that three very interesting and relevant questions could have been raised here. First, whether this doctrine of loss of substratum of the company applies in the case of a shelf company whose objects are all paper" objects designed for all things and for all seasons? If the answer is in the affirmative, then the second question is, Can the court look beyond the memorandum of association in order to ascertain the true and main object or objects of the company? Thirdly, assuming that the main objects of the company have been determined, what constitutes loss of substratum? In relation to the first question, one might get some assistance if one considers the basis or rationale behind the doctrine of loss of substratum. Menhennitt J in the case of Re Tivoli Freeholds Ltd25 stated: It has been recognised that it may be just and equitable to wind a company up if the company engages in acts which are entirely outside what can fairly be regarded as having been within the general intention and common understanding of the members when they became members ... The cases on loss or failure of substratum are an illustration of this more basic concept: Re Wondoflex Textiles Pte Ltd.26 This more basic concept is not, it appears to me, confined to eases of partnership" companies or main object" companies. Whilst it may be easier to find the general intention and common understanding in those cases I can see no reason in principle why it should be confined to such cases and I am not aware of any decision that it is so confined. It can be seen that the basis of the loss of substratum doctrine is that the company is to be wound up be-

cause the company engages in acts entirely outside the general intention and common understanding of the members of the company. And as stated by Menhennitt J in the quotation above, the doctrine is not confined to such cases of partnership companies or main object companies. Hence the answer to the first question above is that the doctrine of loss of substratum of the company applies to shelf companies as well. The learned judges did not discuss this issue but proceeded on the assumption that this doctrine applied to shelf companies formed for all things and for all seasons and went straight to the second question of whether it is permissible to go beyond the companys memorandum of association to ascertain the main objects or the general intention and common understanding of the members. As regards the second question, it is submitted that the approach taken by the learned judges was a logical thing to do as neither counsel had dealt with the issue of whether assistance can be sought from elsewhere if the memorandum of association lent no assistance. As a writer has stated: It is still an open question whether a court may go beyond the memorandum of association in determining what a companys main objects are.27 Needham J in Re Johnson Corporation Ltd28 said: It is, in my opinion, still an open question whether, in determining whether a company has main objects and, if so, what they are, the court may go outside the memorandum of association. It could be argued that a prospectus issued at the time of incorporation could be examined, although, I hasten to add, there is authority against that proposition. One may wish that Chan Sek Keong J had gone further and considered the various reasons, for and against, rendering it permissible to go beyond the companys memorandum of association to ascertain the main objects of the company, since this is still an unsettled question and is a matter on which there is a conflict of authority.29 It appears from

the case that, in the case of shelf companies with paper objects designed for all things and for all seasons, one can look beyond the companys memorandum of association. The writer submits that a consideration suggested by Menhennitt J in Re Tivoli Freeholds Ltd30 be adopted: However, a basic consideration is that the material being looked at must establish something general or common to all members and this consideration of itself precludes something passing between only the company and a particular shareholder unless it can be concluded that it was a matter common to all shareholders. The companys course of conduct may be relevant but it could not prevail against the conclusion to be drawn from the memorandum; on the other hand, it may be useful to remove ambiguity. The judgments conclusion that the companys substratum disappeared with the termination of the lease of the premises at Shaw House is interesting because of the questions that were left unasked. Is it sufficient to show that the company has merely abandoned the pursuit of its main object or must it be proven that the attainment of that object has become physically or legally impossible? The case does not necessarily imply that the former is acceptable. This is because the main object of Good Wealth Trading Pte Ltd was taken to be that of running a restaurant at Shaw House. This had become impossible. It is notable that if the main object had been conceived more generally (say that of running a Chinese restaurant anywhere) the outcome might have been different as far as loss of substratum went. And what is the measure of failure which must be established before it can be said that the main object of the company has become unattainable? Is it sufficient if the company has been financially disabled from attaining its objects or is incapable of making profits?31 Conclusion This case provides a few signposts along a difficult path. First, it is quite clear that Lord Wilberforces princiAsia Business Law Revie w No 2 July 1993

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ples in Ebrahimi v Westbourne Galleries are the test to be applied in Singapore for winding up under the just and equitable ground. Secondly this ground may apply even to shelf companies. Thirdly the association breakdown of which justifies a winding up under this ground need not have been formed at the outset of the incorporation of the company. However it is still not too clear when a loss of substratum will occur. This may depend on how specifically or generally the parties (and especially the courts) conceive the main object of the company.

23 24 25 26 27

Above n 2 at p 305. Above n 2 at p 308. [1972] VR 445 at pp 468 and 469. [1951] VLR 458. Walter Woon Company Law (1988) at p 488. 28 (1980) 5 ACLR 232 at p 235. 29 Above n 25 at p 472. In the case Menhennitt J cited many authorities supporting and dissenting from the proposition that only the memorandum of association can be looked at for the purpose of finding the

principal objects: see pp 471 and 472. 30 Above n 25 at p 472. 31 Mcpherson Winding Up On the Just And Equitable Ground (1964) 27 Modern Law Review 282 gives an excellent discussion on these points. I would like to thank my colleague Mr Dennis Ong for his invaluable thoughts and- comments on my earlier draft.

Endnotes * LLB Singapore LLM Cantab. Advocate & Solicitor Supreme Court of Singapore Senior Lecturer School of Accountancy & Business NTU Singapore. 1 Cap 50 1990 Ed. 2 [1992] 2 SLR 296 at p 308. 3 Ibid. 4 In his judgment in the High Court see [1991] 2 MLJ 314. 5 Above n 2 at p 303. 6 [1916] 2 Ch 426 at p 435. 7 Above n 2 at p 304. 8 Above n 6. 9 Sweet & Maxwell (15th Ed 1984) at p 704. 10 Above n 6 at p 432. 11 [1964] 27 MLR 282 at p 296. 12 Above n 6 at p 431. 13 Above n 6. 14 [1924] AC 783. Another distinguishing feature between the Loch case and the present case was the presence of some form of misconduct generally involving fraud in or mismanagement of the affairs of the company in the former case whilst there was no evidence of such misconduct in the present case. 15 [1973] AC 360 at p 379. 16 Above n 2 at p 306. 17 Ibid. 18 See Chestermans article The Just and Equitable Winding Up of Small Private Companies (1973) 36 Modern Law Review 129 at p 131 for an interesting discussion of the problems encountered when one goes on this theory. 19 Above n 15 at pp 379 and 380. 20 Above n 15 at p 379. 21 Ibid. 22 For an interesting discussion of what conduct will justify a winding up on the just and equitable ground see Prentices article Winding Up: Partnership Analogy. (1973) 89 Law Quarterly Review at p 107.
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Legislation Comments
Singapore

Interpretation (Amendment) Act 1993: Flood of Light1 or an Exercise in Futility?2

by Dennis Ong*
There is an old exclusionary rule in England invented by the judges3 although not always honoured by them4 which prevents judges from overtly5 referring to parliamentary materials as an aid to statutory construction. The rationale for this anomalous rule6 has never been clearly articulated but may perhaps have had something to do with its historical past and the doctrine of separation of powers.7 The constitutional rationale necessitated the respect between the legislative and judicial branches of government and is clearly demonstrated in the judicial application of the literal rule of statutory construction.8 However of late the rule has been defended on practical terms9 in that an immense increase in time and cost of litigation would ensue from a relaxation of this antiquated rule. This economic argument a matter of grave public concern has been a restraint on the impetus for legislative change in relaxing the exclusionary rule in England.10 In November 1992 the House of Lords delivered judgments in Pepper (Inspector of Taxes) v Hart11 and effectively relaxed the exclusionary rule albeit with strict safeguards. The Australians took this decisive step via legislation some ten years earlier.12 Singapore Parliament preferred the tried and tested path of the Australian experience and consequently modelled the Interpretation (Amendment) Act 199313 along broadly similar lines to that of the Australian provision. The almost wholesale transplantation of the Australian Act raises several intriguing questions themselves touching upon statutory interpretation. In addition on account of the Interpretation (Amendment) Acts lineage several important Australian decisions pertaining to the parent provision may have a strong and determining influence in Singapore.14

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